French banking

Bad harvest

Big banks eye the retail deposits of France’s accident-prone mutuals

OVERALL, French banks have had a good credit crunch. No French institution has had to be rescued by the state. There has been one big bail-out, of Dexia, a Franco-Belgian lender, but France's finance minister, Christine Lagarde, was quick to assert that the bank was in fact Belgian by capital and supervision. France has set aside €40 billion ($52 billion) to boost capital, but only a quarter of that has been requested by banks, a fraction of the sums pumped into American, British and German lenders. And BNP Paribas has emerged as one of the main winners from the crisis. In October it snapped up the Belgian assets of Fortis, a Belgo-Dutch bank, for a bargain price, and became the biggest bank by deposits in the euro zone.

Its listed rival, Société Générale, has had some bruising experiences, such as losing €4.9 billion in a rogue-trading incident in January. But unexpectedly, France's mutuals, traditionally conservative institutions who normally lend small sums, have come out the worst from the crisis. In recent years the mutuals aggressively sought to increase their presence in investment banking. In 2004, for instance, Crédit Agricole hired Marc Litzler, a star from Société Générale, to turn Calyon, its investment bank, into a global player. In 2007 Calyon suffered a €250m hit from rogue trades in its New York office. During 2007-08 Crédit Agricole took pre-tax write-downs and provisions of €6.4 billion relating to America's subprime crisis, more than any other French bank. The losses nearly cost the job of the bank's chief executive.

The latest mutual to stumble is Caisse d'Epargne, France's third-largest retail bank, whose top management resigned in October after admitting a loss of €600m on equity derivatives. Caisse d'Epargne was negotiating the terms of a merger with Banque Populaire, a smaller mutual, and will now have far less clout in the discussions. The merger is in part designed to shore up Natixis, an investment bank that they jointly own. It was forced into a €3.7 billion rights issue in September after heavy losses in the subprime crisis.

Bankers reckon that the number of incidents at the mutuals indicate an underlying problem with their ability to handle investment banking. “On the face of it, the major failings in risk management have occurred more at the mutuals than at the listed banks,” says Nicolas Véron of Breugel, a think-tank in Brussels.

One problem, says Wim Fonteyne, an economist at the IMF who has studied European mutual banks, is that a large chunk of their capital is not owned directly, since their members are entitled only to the initial, nominal value of their shares, not to the banks' vast reserves of retained earnings. Having big pots of money with unclear ownership “can encourage risk-taking in the capital markets that may not be in the best interests of mutual members,” Mr Fonteyne says.

Another issue is governance: mutuals' board members are elected from among their members, and are not always professional bankers. Some members of Crédit Agricole's board, for instance, are farmers by background. That should not disqualify them. But it gives them a lot to learn about capital markets. Following the losses at Calyon, Crédit Agricole in May replaced Mr Litzler with a long-term insider from the bank who has admitted that he does not know much about investment banking.

The only mutual which has not suffered a big loss either directly or indirectly is Crédit Mutuel. It learnt a lesson in 2005 after losing €320m on equity derivatives. In July Crédit Mutuel bought Citigroup's German consumer-credit business for €4.9 billion, and this month bought 67% of Cofidis, a distressed French consumer-lending business, for €1.9 billion. That worries some analysts. “It's not a good time to take on more exposure to consumer finance,” says Nathalie Deliens of Société Générale.

But aside from their investment-banking activities, the mutuals have big retail-deposit bases, a cherished attribute in this crisis. They collectively sit on 57% of French retail deposits, according to Fitch, a rating agency, compared with just 8% for BNP Paribas and 7% for Société Générale. That also makes them a tempting target. BNP Paribas is said to be keen to get its hands on one of them to boost its presence in French retail banking. For a listed bank to carry off a mutual would be unprecedented. A deal would require a new law to resolve the question of mutual status, and strong backing from the government. But if it were ever going to happen, now would be the likeliest time.